Retroactive amendment to loosen eligibility

A plan sponsor wants to make profit-sharing contributions for the 2021 plan year to employees who did not meet the plan's eligibility criteria in 2021. There is no testing failure if they remain excluded.

Is it possible to amend the plan now to make the eligibility terms less restrictive? It seems like an -11(g) amendment would not work because it wouldn't be correcting a failure. Likewise, we're beyond the timeline for adopting a discretionary amendment.

If they received allocations anyway, despite the plan terms, how would everyone view a retroactive corrective amendment under SCP to conform to the plan's actual operations (i.e., retroactively loosen the eligibility terms for the profit-sharing component only)? Only non-HCEs are in the potentially expanded group. The expansion would not cover the deferral components so there wouldn't be an issue with their inability to defer in 2021.

Is there any other way to accomplish?

Appreciate any insights.

One way that would work but may not be the most attractive is to retroactively adopt a new profit sharing plan back to 1/1/2021 that has the same provisions as the current plan except with the expanded eligibility and either off set the benefits in the new plan by the old plan and test them together or just make the contribution for all into the new plan. Then at some point merge the new plan into the old plan.

I think there is talk of doing what you want in just the original plan with the amendment in Secure 2.0 but that may or may not happen in this years congress and may or may not be in the final version of the bill.

Thanks, and appreciate you flagging the SECURE 2.0 proposal. 

I thought the consensus was that -11g amendments could be used even without any sort of failure.

If it's a nondiscriminatory group you could amend the plan to provide a higher contribution rate for these participants for 2022, right? Would delay the deduction by a year, though.

If the contributions/allocations were already made without knowledge that the plan's rules did not permit them, then I think you could amend the plan retroactively under SCP to provide for the allocations. See Section 4.05(2)(A) of Rev. Proc. 2021-30:

(a) Correction of Operational Failure by plan amendment for a Qualified Plan or § 403(b) Plan. A Plan Sponsor of a Qualified Plan or § 403(b) Plan may correct an Operational Failure by plan amendment in order to conform the terms of the plan to the plan’s prior operations only if the following conditions are satisfied: Rev. Proc. 2021-30 Page 16 of 140 (i) The plan amendment would result in an increase of a benefit, right, or feature. (ii) The provision of the increase in the benefit, right, or feature to participants is permitted under the Code (including the requirements of §§ 401(a)(4), 410(b), 411(d)(6), and 403(b)(12), as applicable), and satisfies the correction principles of section 6.02 and any other applicable rules of this revenue procedure.

On 5/20/2022 at 9:05 PM, Luke Bailey said:

Would delay the deduction by a year, though.

Would it still be deductible if the total amount of the contribution doesn't exceed the 2021 deduction limit determined without regard to the amendment?

8 hours ago, C. B. Zeller said:

Would it still be deductible if the total amount of the contribution doesn't exceed the 2021 deduction limit determined without regard to the amendment?

C.B. Zeller, if SCP were used and the amendment went back to 2021, it would be deductible for 2021, I think, if the employer is on extension for its tax return. But if the amendment were made for 2022, i.e., not as a correction, then would not seem to meet the "on account of such taxable year" requirement of 404(a)(6) for 2021.

I'm thinking back to a Relius seminar I went to led by Robert Richter (whose voice is like a friendly version of Belichick!), who mentioned that any -11g amendments typically don't get you the extra deductibility - you have to use the rules of the plan as they were in effect on actual 12/31 (not including anything adopted retroactively).   

So while the overall dollar amount might be under the 404 cap for the plan, I suppose the hangup is whether or not making a contribution for someone beyond what they would have had in the first place, then becomes a qualifying ordinary business expense like it would be for the original plan layout as of that date.